40% of Americans believe that purchasing real estate is one of the most stressful experiences of all-time. In 2020 this made for the majority of first time home buyers.
The process of buying your first house can be complicated and riddled with challenges. A number of new house-buyers every year make mistakes on the market when buying their first homes. With the current global economic slowdown, mistakes can be costly and you can’t afford to make them.
Common issues like avoiding the myths by mortgages and getting acquainted with common mistakes by inexperienced buyers is a first step in the right direction. However, there are a range of mistakes that you should lookout for as a significant percentage of these mistakes are avoidable.
Shopping for for your first home shouldn’t be stressful but fun and exciting. It helps to understand which common issues to prepare for and how best to prepare for them. Here are a few tips you to get it right and includes mistakes to avoid as a first time home buyer.
Looking for a home before getting preapproved
Get your mortgage preapproved helps you in a few ways. It provides a first time home buyer with a rough idea of how much they can afford. When you’re applying for new home before getting approved there’s a higher risk that you will find homes that you are interested in but are out of your price range. This will dampen and sour your overall experience which then affects your judgement. Getting preapproved is an important step when buying a home because it allows you to focus on your finances.
Additionally, in many markets housing inventory remains tight because there’s better demand on the market by buyers than affordable homes on the market. If you are not preapproved for a mortgage you could lose a home. Getting preapproved for a mortgage implies that you’re a serious purchaser who can meet their credit and finances without any trouble. It also helps you determine the cost of monthly mortgage payments and if you can afford them.
Confusing prequalification and preapproval
Pre-qualification is regarded as the first step during the homebuying process and involves submitting your financial details to a mortgage lender who then determines how much you can access based on your credit score and financial health. This process also offers the potential homebuyer the opportunity to learn about different mortgage options and collaborate with your lender to identify the right mortgage for your needs and goals.
Does prequalification affect credit score? No prequalification does not affect your credit score.
On the other hand, the preapproval for a mortgage process is an offer (but not a commitment) to lend you a specific amount.
So, how long does a preapproval for a mortgage last? It is estimated that preapprovals last for 90 days.
This process confirms your creditworthiness and ability to procure a home. A preapproval is a loan approval condition in which your credit rating and ability to repay are assessed by an underwriter. In general you must qualify before the loan can be issued. This will require you to not change your position in regard to the information you originally provided and you to choose a property that is in line with these guidelines. Preapproval also comes with ability to ascertain your down payment and how much monthly payment you need to pay to make up the difference.
Applying for a loan or credit card before closing
When you get a loan they examine your debt/income ratio. If someone borrows cash before you sell off that can lead to problems. You might also end up lowering your credit score by using a new loan. If your score drops below that of a typical mortgage score, you might still be unable to finance you new home. You should not applying for credit until you sign all documents and your home is now yours. It is not worth the risk of not getting to the amount previewed for it as it could make the loan more costly.
Making a down payment that’s too small
A bigger down payment can make your mortgage affordable and gives you easier monthly payment schedules and amounts. Some lending programs provide you with 0 down or 3,5. This is always an unintended effect of taking more time to save. However, the risk of increasing home prices comes with an increase in mortgage rates which makes this move more expensive in the long run. While the final down payment amount is a judgement call based on your financial abilities, you should consider making a sizeable minimum down payment.
Not looking for first-time home buyer programs and grants
First time buyers often overlook all the programs offered to first-time home buyers or don’t even know about them at all. These lending and credit programs are available in order to improve the affordability of home ownership. There are several low-down payment loans, grants, and buyer programs for first time homebuyers. 11 percent of millennial homeowners says they regret not using home buying programs and grants during the initial process. Additionally, some mortgage lenders offer different programs for first-time home buyers with some programs accepting loans with a 3.5% minimum cash down payment and others have lower amounts. Ask your preferred mortgage lender about their mortgage plans and look for programs in your state. Such programs include state programs that provide low-interest assistance and competitive mortgage rates for first-time buyer. Find a state program that provides you support such as the state Department of Agriculture or Veterans Affairs to the competitive mortgage rates you can have. First time home buyer programs and grants will help you overcome a significant number of these problems.
You could also explore first time home buyer tax credit that was instituted in 2021 under the The First-Time Homebuyer Act of 2021. This first time home buyer bill was enacted to provide first time home buyers with tax credit for their purchase.
You should do your research on such programs keeping in mind that some lenders often refuse to finance home purchased by some of these programs. Learn more of these program by visiting your local government offices.
Talking to only one lender
First time buyers often make the mistake of getting mortgages from the first or only lender or bank they speak to. Studies have shown that this is an expensive mistake as you might access lenders with higher interest rates. This is because even minor fluctuations in mortgage interest rates could potentially save you thousands of dollars. No two lenders are the same and each one may be offering different mortgage interest rate schemes and different monthly mortgage payment schemes on different loan programs. With multiple lenders in stock you would easily be able to choose the one that will save you most money. You also look beyond conventional loan programs and into newer and cheaper ones.
It is advisable for you to visit a couple different mortgage lenders and consult mortgage broker. Other things to consider when looking for a mortgage lender include Customer service and responsiveness as they also play important roles in a seamless approval process. It is also important to know that low interest rates does not necessarily make a mortgage lender the best choice. This is because Low interest rates often lead to an increase in mortgage applications and certain lenders will be late to closings than others. The more you shop around, the better comparison you can get and the higher chances of mitigating risks associated with unsuitable mortgage
Ignoring VA, USDA and FHA loans
Many people often overlook the borrowing options which come with the US-based VA or USDA borrowers. These financial loans are usually easier to obtain, but examining them may prove costly. Some of the advantages that come with these products include no down payment, a lower credit score, no mortgage insurance, and the ability to add closed costs onto a credit score. Learn about these government programs that are designed to enable you to buy a home without any down payments will help you save in the long run. For instance, the lending from Federal Housing Administration provides for smaller deposits as low as 3.5%. Similarly, USDA loan can be used to buy real estate on U. S. d’azur rural zone deemed as being rural. VA loans can also help you access more affordable housing that meets your needs. Monthly payments and on such loans are also affordable and easier to keep up with.
Find out your options based on benefits and eligibility requirements.
Not factoring in the neighborhood and yard
First time home buyers often overlook important factors that need to be considered including neighborhood, yard school district and proximity to facilities. If the neighborhood is not good it could lead you to having difficulties when selling your home if you need to sell it. Geographical location also comes with property taxes. These taxes often contribute to maintenance cost of your house and you should ensure that you are able to meet them. Additionally, your might be attracted to a house with a big lot or backyard but this comes with extra maintenance costs. Factoring in these issues will ensure that you buy a home that absolutely fits your needs and maintenance budget.
Assuming your credit score is fine
Your credit score is one of the most important things to consider on acquiring a home loan. It plays also huge factors in the amount that it will cost to borrow. To avoid more debt or an unexpected refusal to pay for the loan check you credit rating and score as soon as possible. If your score is smaller than you can imagine then you may try a different strategy before you buy.
Most people often assume their credit is fine just because they pay their bills on time. However, there are numerous factors that contribute to your credit score. For instance, Your debt to income ratio also plays a huge role in your credit worthiness. As such, you should endeavor to check your credit score by getting a credit report at the beginning of the home buying process.
Assuming you need a big down payment
The biggest obstacle to homeownership is the down payment. For many Americans who don’t own any homes the fear comes from an inability to have funds saved. Ask your creditor about loan programs for down payment that can help you overcome financial stress that comes with down payment schemes.
Here are some ways to lower this obstacle. Both a USDA mortgage and a VA mortgage offer 0% of the cost for their loans. An FHA loan requires just down.3.5% and is available to Low-to-Moderate Income borrowers. If interested check out our home buyer checklist for everything to do to buy or have a home.
Draining your savings for a down payment
Many hidden and unexpected costs accompany buying house. Without additional money for these costs, you could get yourself into deep financial stress. As you are looking for the right time to buy your home make sure that you have enough money to pay a down payment and the closing cost without taking away any of your savings. You want a savings account or emergency fund that holds at minimum three months of living expenses that you’ve saved up.
Overlooking the extra costs of homeownership
Know other costs associated with home ownership – and pay them. Be vigilant of extra costs incurred to be a homeowner. Plan for the extra costs you should pay – mortgage down payment, homeowners insurance, mortgage insurance and all other maintenance costs like property taxes. You’ll also have to pay fees to a homeowners’ group. If you open the account with your financial institution or lender they can charge you in property tax and property taxes over the course of your mortgage principal and interest. Your taxation might even be slightly increased after selling based on the value of your property. When determining how much your budget can afford for your home, include these costs.
Buying the most house you can afford
In a time of extreme budgeting, it’s easy to fall in love with a home. Keeping yourself under control is always wise. If you buy a house that you cannot afford it may lead you to foreclosure. You will also lose much of the room in your monthly budget to spend on other expenditures. Always be honest about your finances with your loan/merger agent. The lender knows your income and even your debt-to-income ratio they just doesn’t take into account in relation to monthly expenses. The Lender does not know your daily expenses such as how much you pay for groceries, utility bills, gas or insurance. The more money you borrow the longer you have to pay it off.
A bigger home means more heating and cooling capacity resulting in higher utilities fees. For example a 3% down payment on a $150k home would cost about $4,500. For a $200,000 home, a down payment of $6,500 will cost $5,000. Factoring in the cost of mortgage insurance should also be prioritized. A larger home could come with other more significant costs. It is often recommended that your monthly mortgage payment should be approximately 28% of gross income per month. The idea that it is not necessary to prioritize needs like stainless appliances over need (a few bedrooms) is also one strategy that leads to excessive money spending.
Skipping the home inspection
The home inspection protects both bank and buyer from purchasing the property which the seller might not want. An inspection looks inside the home to see if the foundation is in good state. If you don’t get a home inspection to fix an issue that you could have handled at a cost to the vendor (or to negotiate a lesser price).
Sometimes professional inspectors detect things that we don’t see ourselves. If you are purchasing older homes this step can be especially helpful. If your home needs huge repairs that can’t be seen by the naked eye an inspection gives you the chance to make adjustments or negotiate on the owner’s side to get the problems corrected. An inspection is an additional expense that is unknown to a first-time homebuyer and one they might feel safe to abandon for an already existing home without a build date for construction. However, it can end up saving you thousands on the buying fee that can be put towards the repairs. You want to attend the inspection to understand the home and have the questions discussed and clarified to you right away. Should a problem arise you will need to talk to the seller to resolve it.
Forgetting about moving costs
First time home buyers often forget that moving is costing money. Choose whether to use professional moving company or enlist help from family or friends. So that the costs are less and the demand is low, consider moving in a weekday. This may include packing bags, packing boxes blankets, dollies and bubble wrap.
Waiting for the perfect home
The idea of looking for what you desire is something many buyers mistakenly make. You can give up very good homes either to a good price or a good neighborhood. Instead of rethinking the list of need-haves and deal-breakers you should always remain open to the possibilities. Remember though it’s not always about the right appearance. It’s about making a perfect place for your family or living what you want.
Not budgeting for closing costs
Closing costs must be paid at closing. These closing costs include attorneys fees and title insurance. These costs are due upon your signature of your mortgage loan document. If you don’t know how much you need to spend on closing costs you could be withdrawing money from your saving. Other costs like flood insurance or homeowners association or specific mortgage fees differ depending on where they live and the type of loan you use. Normally closing costs total about 3 to 5 percent of the buy price. Add this cost to your budget.
Not knowing whether to pay discount points
Discount Point is cost you pay upfront to cut your mortgage-reserve interest rates. The value of buying points depends on whether you plan to live in this home long enough that the “break-even period” is the period during which a monthly payment can be compared to the initial costs. If you have enough money on hand the choice is simple: Don’t buy any discount points. How much discount points you have available depends on the size of the investment that has occurred.
Getting the wrong kind of mortgage
A majority of mortgages are at least 40 percent fixed or 30-year fixed-rate. Fixed-rate mortgages give people a guarantee on their interest rates. This APR of the lender has to change with market movements. So as rates rise it might affect how many you will pay. Lenders want you to stay in debt as long as possible for the reasons of earning interest from you. People will normally sign for a 30 yr mortgage and if you choose such options you’ll pay much more over the life of your loan. Do your research on the most suitable mortgage plan for your financial health and status.
Allowing the market to dictate your moves
Sometimes you may be overjoyed when you buy your first home but make time to see if you are impulsive. This often happens particularly when the market is declining with an increasing number of foreclosures. Over time first-timers get completely deceived by the first home that they see and neglect the financial responsibilities that accompany a home purchase. You should ensure that you enter this process with a clear mind and avoid confusing/rationalizing your thoughts and desires for logic.
How do you become a first time home buyer? By preparing for such mistakes and many more to happen. Set in stone a plan that will mitigate these risk and create a seamless and affordable process for you and your loved ones. Make an emergency fund and start saving the deposit.